How risk assets recover after rate hikes
Looking at the performance of risk assets following the 1970s ‘Great Inflation’ can soothe investors’ angst, according to J.P. Morgan Asset Management (JPMAM).
Speaking at the JPMAM Q2 briefing, global market strategist, Kerry Craig, presented a graph depicting the average returns of risk assets at the beginning of the 1970s Federal Reserve hiking cycle as well as three and 12 months later.
Craig said the blue bar in the graph showed three months after rate hikes in the 70s, showing volatility, even negative performance.
But, “12 months after that first rate hike generally the market has a better idea about where Federal Reserve and central banks are heading, better idea about the outlook for the economy and also the fact that it's usually meaning the economy is looking pretty good,” Craig said.
Source: Bloomberg, J.P Morgan Asset Management
Craig said there was still scope for earnings growth and support for equity markets once the market recalibrated to higher rates, with valuations coming down, and once it realised that the outlook was not as bad as was indicated by early warning signals, such as the yield curve.
Craig suggested investors rotated to quality assets but also considered ‘bar-belling’ the emerging market.
The barbell strategy suggested the best way to strike a balance between reward and risk is to invest in the two extremes of high-risk and no-risk assets while avoiding middle-of-the-road choices.
But according to Craig, there were challenges to barbelling emerging markets.
“There are challenges there as we think about what's happening in China and the prospect of its growth outlook, given the lockdowns that are happening at the moment, as well as issues around the property market.
“But offsetting that there’s obviously the policy response we see to come through both on the fiscal and monetary side and we also look at Asian markets more broadly starting to reopen, increasing domestic demand that will come through and offset some of the drags which you traditionally get, from higher rates, and perhaps the stronger US dollar when it comes to those markets.”
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